The Money Has to Come From Somewhere

After the current turmoil in the markets, I was hoping that new Federal Reserve
Chairman Ben Bernanke would see the big picture and act judiciously. Instead
he signaled, with an aggressive rate cut, that we can expect a continuation
of the monetary policies that got us here to begin with. Alan Greenspan released
his memoir this week explaining his policies and decisions in the wake of the
irrational exuberance they fueled. His successor should see that it is now
time for a change of policy that addresses the root of our troubles. But instead
of seeing an inflation problem, the Federal Reserve sees a liquidity problem,
which is a little like extinguishing a forest fire with gasoline. In the wake
of the rate cut, the Dow jumped and brokers cheered. Behind the headlines,
however, the dollar quietly fell and was abandoned by more of the world in
favor of more solid stores of wealth.

The Fed does not act in a vacuum. Mr. Greenspan rightly criticizes Congress
and the administration for abandoning principles of fiscal responsibility.
However, monetary policy at the Fed did nothing solve money problems, but merely
delayed impending crises by creating bubbles.

In a very real sense, the Fed and the government are close to going over the
spending limit of our nation's credit card. We rely on foreign investors to
buy our debt so our government can maintain its appetite for spending. Yet
the market for US Treasury Bills is rapidly shrinking as yield declines. Still
the government will need an estimated $100 billion more for every year we "stay
the course" in Iraq, not to mention what a possible conflict in Iran could
cost.

Yes, the money has to come from somewhere, but we are running out of sources
to tap.

Printing more money is the Fed's typical answer, but we are on the verge of
runaway inflation. We have printed so many dollars now that we are at parity
with the Canadian dollar for the first time since 1976. Since the Fed stopped
publishing M3, which tracks the total supply of dollars in the economy, we
can't even be sure how many dollars they are creating. Reported inflation is
around 2%, but the method for calculating inflation changed in the 1980's,
largely at Mr. Greenspan's urging. Private economists using the original method
find actual inflation to be over 10%, which matches more closely the pain consumers
in the real economy feel.

The reality is that this type of manipulation of the markets masks where resources,
or money, ultimately comes from. It comes from the taxpayer. The government
doesn't create Gross Domestic Product, they just limit and control how it is
done. They then absorb much of the value produced in the economy through taxation
and inflation, so they can squander our nation's wealth with runaway spending.

The Fed tries to keep up with government's spending habits, but is sending
inaccurate signals to mask bad monetary policy. Ultimately, we'll get back
on track financially only when government spending is held in check and the
free market controls monetary policy, not the other way around.

Congressman Ron Paul of Texas enjoys a national reputation as the premier
advocate for liberty in politics today. Dr. Paul is the leading spokesman
in Washington for limited constitutional government, low taxes, free markets,
and a return to sound monetary policies based on commodity-backed currency.
He is known among both his colleagues in Congress and his constituents for
his consistent voting record in the House of Representatives: Dr. Paul never
votes for legislation unless the proposed measure is expressly authorized
by the Constitution. In the words of former Treasury Secretary William Simon,
Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.